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Apple's
aapl -0.8467199493550684%Apple Inc.U.S.: NasdaqUSD125.3
-1.07-0.8467199493550684%
/Date(1427828780682-0500)/
Volume (Delayed 15m)
:
24463904
P/E Ratio
16.784471218206157Market Cap
736073426681.742
Dividend Yield
1.4994416972403892% Rev. per Employee
2153110More quote details and news »aaplinYour ValueYour ChangeShort position
recent decision to raise its stock-buyback program to $60 billion and sharply increase its dividend is the equivalent of a massive put that will keep the stock from suffering another sharp decline, attractive opportunities exist to trade against the stock's newfound stability.

By selling puts on Apple and agreeing to buy the stock (ticker: AAPL) at lower prices should it decline, investors can collect hefty premiums from the options market.

With the stock at about $450, Apple's October 425 put was bid at $21.10, and the July 425 put was bid at about $10.

The selection of two different expirations reflects two streams of thought. The July put makes sense for investors who think the recent stock rally may fade once the excitement about the largest stock-buyback program in the history of the world is overshadowed by old concerns about Apple's failure to introduce anything new and innovative. The October put makes sense for investors who think those concerns are overshadowed and contained by the buyback.

Indeed, a Goldman Sachs study released in 2009 supports the idea of selling puts on companies with large stock-buyback programs. The study concluded that buyback programs represent a persistent bid supporting stocks that can be exploited by selling puts ("An Options Twist on Stock-Buyback Plans," Barrons.com, Dec. 16, 2009).

The put-trading strategy's risk is tempered by Apple's stock gain of some 15% on the capital-return news. The rally suggests that the stock, which had been shunned after falling from about $700 to just under $400, has bottomed, which is trader parlance for the end of a decline and the possible start of an advance.

Of course, Apple is in many ways different from the standard company buying back stock, if for no other reason than Apple is one of the world's largest companies, it has fallen sharply from grace over the past six months, and investors doubt its ability to introduce revolutionary products.

Ironically, this has the salubrious effect of inflating Apple's bearish put options with enough fear premium to reward investors for taking the risk of selling something that obligates them to buy the stock at a lower price. If Apple's stock keeps declining—say Apple pushes past its 52-week low of $385.10, set April 19—investors who sell puts are still obligated to buy the stock at the put's strike price or they must pay up to close out the position. Such is the known risk embedded in the trade thesis.

BUT ANOTHER FACTOR, not yet known though under discussion among investors, also animates the put trade: Will Apple sell puts as part of its stock-buyback program?

Corporations often sell put options as part of their buyback programs. If Apple does the same, its put prices would almost certainly decline because heavy put selling lowers implied volatility, which is the most critical part of options-pricing models. An Apple spokesperson declined to comment, "at least not at this time," on whether put selling is part of the buyback program. All that is known thus far is that Apple will begin buying stock under the authorization this month and complete the buyback program by the end of 2015. Apple also expects to buy stock in the open market and to use an accelerated share-repurchase program, which one trading strategist says suggests the company would sell put options.

Apple's implied volatility is now about 26%. This indicates the options market is pricing the stock as if it will move about 1.6%, up or down, each day. The key question is whether that's too much or not enough. A lot of money will be wagered on the outcome.